Complicated New Rules and Aggressive FTC Oversight Requires a Disciplined
Approach in the Review and Application of Advertising
Advertising the sale or financing of motor vehicles has become increasingly complicated with an aggressive Federal Trade Commission (FTC) and the need to reach consumers (especially Millennials) through social media, which was never thought of when advertising laws and regulations were written. It certainly makes a dealer’s life more complex.
The FTC has launched a new automotive program since the Dodd-Frank Act gave it streamlined authority to write regulations. It has also become much more active in pursuing dealers for deceptive advertising under Section 5 of the FTC Act. (Since 2012, the FTC has brought 16 cases against auto dealers for deceptive advertising.) The FTC’s Head of its Bureau of Consumer Affairs said the FTC believes that deceptive dealer advertising is a “significant problem,” many automotive dealer investigations are “in the pipeline,” and that this is a “priority area” for the FTC.
The FTC’s Definition of Deception
The FTC defines “deceptive” as any representation, omission, or practice that is likely to mislead a consumer acting reasonably under the circumstances. The representation, omission, or practice must be “material” which generally means whether it is likely to affect a consumer’s conduct or decision with regard to a financial product or service, such as automotive financing. A recent FTC consent order was based on an advertisement that held in big bold print “2013 KIA Sportage. $0 down and $99 per month.” Buried in small faint-gray type with the background of a white and silver wheel were a series of disclosures that included noting that only the first two months were at $99 – with the remaining 70 monthly payments being $521. Another dealer advertised a low vehicle price but buried in the inconspicuous footnote was a $5,000 down payment requirement.
Another deceptive advertisement listed favorable financing terms for a vehicle but failed to disclose that in order to qualify, consumers must have met numerous other criteria which few, if any, could collectively meet. This is called “rebate stacking” and the FTC considers it to be deceptive as well.
Clear and Conspicuous
Qualifications must be “clear and conspicuous” and small print type at the bottom of a page apparently doesn’t do it. Nor do disclosures on a different page in a multi-page flier from where the qualified term is advertised. It is the overall impression of the ad that the FTC evaluates and it looks at what is not said as well as what is said. Remember, no consumer actually has to be misled by the advertisement. If the FTC determines it is “likely to mislead,” a 20-year consent decree may be in the offing as occurred with these dealers. Any violation by running another advertisement the FTC deems to be deceptive could incur penalties of up to $16,000 per piece mailed or per viewing of a printed or online advertisement.
In determining whether an advertisement is deceptive, the FTC has described the four “P”s that are necessary for dealer advertising. “Prominence” and “proximity” refer to where the qualifications are placed in type size, visibility, and location relative to the qualified term. “Placement” is whether the language is located in a place where the reasonable consumer is likely to notice and comprehend it. Finally, “presentation” refers to whether or not the wording is clear and simple enough to be understood by a reasonable consumer. When the FTC audits a dealer, it will look at sales training material to ascertain what type of language and statements your sales people are trained to make to a consumer as well. The FTC has said that all sums to be paid must be disclosed in the advertisement, except that a dealer can say generally that tax, tags and title fees are additional. Again, all statements must be clear and conspicuous.
The FTC has stated that the following phrases are acceptable: “No down payment” (however this phrase triggers other required disclosures under Federal Truth in Lending as discussed in the next paragraph); “easy monthly payments;” “low down payments;” and “terms to fit your budget.”
Additional Violations
When the FTC comes upon what it believes to be a deceptive advertisement, it doesn’t stop there. It looks for other violations in both advertising and in your dealership. A failure to disclose Truth in Lending (Regulation Z) or Consumer Leasing Act (Regulation M) triggered terms is an example of an additional advertising violation. For credit sales, if you disclose the down payment, payment amount, or period of repayment, then you must also disclose the APR (stated as such), the down payment, the amount of each payment, and the payment term. For consumer leasing, if you advertise the amount of any up-front payment or cap cost reduction, you must also advertise that it is a lease, the total amount due at lease signing, the number and amount of scheduled payments, whether a security deposit is required, and any back-end liability such as for an open-end lease.
With the FTC also focused actively on privacy and Safeguards, an audit of your dealership for prospective deceptive advertising may also uncover violations of these rules or other FTC rules such as the Red Flags Rule concerning verifying customer identity. The FTC argues these violations create “unfair practice” liability under Section 5 of the FTC Act. An unfair act or practice is one that causes or is likely to cause substantial injury to consumers; the injury cannot reasonably be avoided by consumers; and such substantial injury is not outweighed by benefits to consumers or to competition. So, for example, if your privacy notice says that you do not share customer non-public personal information and your DMS provider extracts customer data and uses it for its own purposes (e.g., to create leads or prospect lists), you may be liable under Section 5 for a deceptive and unfair practice for violating your privacy notice.
Penalties for deceptive or unfair practices can range from a 20-year consent decree to a penalty of up to $16,000 per violation, which each advertising piece, each Internet view, and every privacy notice or Safeguards violation being considered a separate violation.
Among other things, the FTC indicated it is actively auditing dealers for Red Flags compliance, Safeguards compliance, payment packing (adding optional aftermarket products such as credit life or an extended service contract to the cost of the vehicle), “yo-yo” financing (spot delivery deals), rebate stacking, and buy rate markups. It recently penalized a dealer for not placing “Used Car Buyers Guides” on used cars in its sales lot. It held hearings on these and other subjects in 2011, and may be ready to write rules or bring more enforcement actions on any of these issues as well.
Social Media Challenges
Internet or social media advertising presents its own set of challenges in addition to possibly being deceptive. All disclosures that need to be made clearly and conspicuously in print must also be made clearly and conspicuously online, regardless of media. (How a 140-character Tweet advertisement can include required disclosures is a mystery). In assessing penalties for deceptive Internet or social media advertisements, the FTC has said the same standards for deceptive and unfair advertising apply.
Another problem with Internet advertising arises if you desire to change any element of the advertisement. Internet copy has permanence and lawsuits have been brought against dealers whose Web advertisements were changed or picked up by different sites, possibly without the dealer even knowing so. When the dealer removed or changed the advertisement, the prior advertisement was still picked up by consumers from the other sites and the dealer was accused of advertising terms that were not actually available, which also violates Truth in Lending. A good practice is to put an expiration date on your Internet advertisements so there is no confusion. Try not to have to change the pricing or other terms for a vehicle posted online.
The FTC has indicated its continuing intention to police dealer advertising as well as other dealer acts under its newfound streamlined Dodd-Frank Act authority. Expect more enforcement actions and possibly a set of rules on issues like spot deals, online tracking, and aftermarket product selling. It has become a far more activist agency since the arrival of the Consumer Financial Protection Bureau and it would appear that each agency is taking a very aggressive, pro-consumer stand. And don’t forget that Attorneys General have broader authority under the Dodd-Frank Act to enforce federal as well as state consumer protection laws as well. Enhance your compliance efforts accordingly.
Randy Henrick is Associate General Counsel, Regulatory and Compliance, for Dealertrack.
This article is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations from a knowledgeable attorney or compliance professional licensed to practice in your state.
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